Volatile Returns: Commodity Investing Through Miners
Investors consider gold and silver as safe haven investments. But the companies that produce gold and silver often offer volatile returns, creating opportunities for astute investors.
Volatility is a double-edged sword, particularly when it comes to commodity investing. During the good times, it can create skyrocketing returns. But during bad times, it can turn ugly.
Today’s infographic comes to us from Prospector Portal, and shows how investing in precious metals equities can outperform or underperform the broader metals market.
Capitalizing on Volatility: Timing Matters
Just like most investments, timing matters with commodities.
Due to the complex production processes of commodities, unexpected demand shocks are met with slower supply responses. This, along with other factors, creates commodity supercycles—extended periods of upswings and downswings in prices.
Investors must time their investments to take advantage of this volatility, and there are multiple ways to do so.
Three Ways to Invest in Commodities
There are three primary routes investors can take when it comes to investing in commodities.
|Direct physical investment||
Among these, commodity-related equities offer by far the most leverage to changes in prices. Let’s dive into how investors can use this leverage to their advantage with volatile metal prices.
The Fundamentals of Investing in Mining Equities
When it comes to commodity investing, targeting miners and mineral exploration companies presents fundamental benefits and drawbacks.
As metal prices rise, the performance of mining companies improves in several ways—while in deteriorating conditions, they do the opposite:
|Category||Rising Commodity Prices||Falling Commodity Prices|
|Outlook||- Improved outlook||- Deteriorated outlook|
|Stock Price Movement||- Equity growth||- Equity decline|
|Dividend Payouts||- Increased dividends||- Decreased dividends|
|Financial Performance||- Increased earnings||- Decreased earnings|
With the right timing, these ups and downs can create explosive opportunities.
Mining companies, especially explorers, use these price swings to their advantage and often produce market-beating returns during an upswing.
The Proof: How Mining Equities React to Metal Prices
Not only do price increases translate into higher profits for mining companies, but they can also change the outlook and value of exploration companies. As a result, investing in exploration companies can be a great way to gain exposure to changing prices.
That said, these types of companies can generate greater equity returns over a shorter period of time when prices are high, but they can also turn dramatically negative when prices are low.
Below, we compare how producers and exploration companies with a NI-43-101 compliant resource perform during bull and bear markets for precious metals.
All figures are in U.S. dollars unless otherwise stated.
|Mining Company||Company Stage||Primary Metal|
|Market Cap. |
Oct 31, 2019
|Market Cap. |
July 29, 2020
|Bull Market Performance|
(Nov. 1, 2019-July 29, 2020)
|Bear Market Performance
(Jan 02 – Dec 31, 2018)
|Auryn Resources||Exploration||Gold, Copper||$181M||$330M||60%||-39%|
|Wesdome Gold Mines Ltd.||Production||Gold||$1,104M||$1,885M||68%||110%|
|Red Pine Exploration||Exploration||Gold||$13M||$22M||29%||-55%|
|Revival Gold Inc.||Exploration/ |
|Erdene Resource Development||Exploration/ |
|Endeavor Mining Corp.||Production||Gold||$2,622M||$5,874M||54%||-13%|
|Yamana Gold Inc||Production||Gold||$4,572M||$8,279M||87%||-22%|
During the bear market period, the price of gold declined by 2.66%, and despite engaging in exploration activity, most companies saw a slump in their share prices.
In particular, exploration companies, or juniors, took a heavier hit, with returns averaging -31.66%. But even during a bear market, a discovery can make all the difference—as was the case for producer Wesdome Gold Mines, generating a 109.95% return over 2018.
- Average returns for gold producers including Wesdome: 24.83%
- Average returns for gold producers excluding Wesdome: -17.65%
During the bull market period for gold, gold mining companies outperformed the price of gold, with juniors offering the highest equity returns averaging 153.43%. Gold producers outperformed the commodity market, the value of their equities increased 69.61%—less than half of that of exploration companies.
Silver: Bears vs Bulls
Similar to gold mining companies, performances of silver producers and explorers reflected the volatility in silver prices:
|Company||Company Stage||Primary Metal|
|Market Cap. |
Oct 31, 2019
|Market Cap. |
July 29, 2020
|Bull Market Performance (Nov. 1, 2019-July 29, 2020)||Bear Market Performance (Jan 02 – Dec 31, 2018)|
|Pan American Silver||Production||Silver||$2,973M||$10,550M||125%||1%|
|Americas Gold and Silver||Production||Silver||$335M||$482M||10%||-56%|
|Dolly Varden Silver Corp.||Exploration||Silver||$28M||$74M||152%||-32%|
|Endeavour Silver||Production||Silver, Gold||$458M||$837M||72%||-10%|
During the bear market period for silver, its price decreased by 9.8%. Explorers and producers both saw a dip in their share prices, with the equity of silver producers decreasing by 21.63%.
However, the discovery of a high-quality silver deposit again made the difference for SilverCrest Metals, which generated a 116.85% return over the year.
- Average returns for silver exploration companies including SilverCrest: 8.32%
- Average returns for silver exploration companies excluding SilverCrest: -27.86%
On the other hand, during the bull market period, the price of silver increased by 34.33%. Silver exploration companies surpassed the performance of the price of silver.
- Average returns for silver producers: 69.04%
- Average returns for silver exploration companies: 95.36%
The potential to generate massive returns and losses is evident in both cases for gold and silver.
The Investment Potential of Exploration
Mining equities tend to outperform underlying commodity prices during bull markets, while underperforming during bear markets.
For mining exploration companies, these effects are even more pronounced—exploration companies are high-risk but can offer high-reward when it comes to commodity investing.
To reap the rewards of volatile returns, you have to know the risks and catch the market at the right time.
How to Avoid Common Mistakes With Mining Stocks (Part 4: Project Quality)
Mining is a technical field that manages complex factors from geology to engineering. These details can make or break a project.
Mining is a technical field and requires a comprehension of many complex factors.
This includes everything from the characteristics of an orebody to the actual extraction method envisioned and used—and the devil is often found in these technical details.
Part 4: Evaluating Technical Risks and Project Quality
We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.
Here is a basic introduction to some technical and project quality characteristics to consider when looking at your next mining investment.
View the three other parts of this series so far:
- Mistakes made when choosing a team
- Mistakes made with the business plan
- Mistakes with project jurisdiction
Part 4: Technical Risks and Project Quality
So what must investors evaluate when it comes to technical risks and project quality?
Let’s take a look at four different factors.
1. Grade: Reliable Hen Vs. Golden Goose
Once mining starts, studies have to be adapted to reality. A mine needs to have the flexibility and robustness to adjust pre-mine plans to the reality of execution.
A “Golden Goose” will just blunder ahead and result in failure after failure due to lack of flexibility and hoping it will one day produce a golden egg.
Many mining projects can come into operation quickly based on complex and detailed studies of a mineral deposit. However, it requires actual mining to prove these studies.
Some mining projects fail to achieve nameplate tonnes and grade once production begins. However, a team response to varying grades and conditions can still make a mine into a profitable mine or a “Reliable Hen.”
2. Money: Piggy Bank vs. Money Pit
The degree of insight into a mineral deposit and the appropriate density of data to support the understanding is what leads to a piggy bank or money pit.
Making a project decision on poor understanding of the geology and limited information leads to the money pit of just making things work.
Just like compound interest, success across many technical aspects increases revenue exponentially, but it can easily go the other way if not enough data is used to make a decision to put a project into production.
3. Environment: Responsible vs. Reckless
Not all projects are situated in an ideal landscape for mining. There are environmental and social factors to consider. A mining company that takes into account these facts has a higher chance of going into production.
Mineral deposits do not occur in convenient locations and require the disruption of the natural environment. Understanding how a mining project will impact its surroundings goes a long way to see whether the project is viable.
4. Team: Orchestra vs. One-Man Band
Mining is a complex and technical industry that relies on many skilled professionals with clear leadership, not just one person doing all the work.
Geologists, accountants, laborers, engineers, and investor relations officers are just some of the roles that a CEO or management team needs to deliver a profitable mine. A good leader will be the conductor of the varying technical teams allowing each to play their best at the right time.
Mining 101: Mining Valuation and Methods
In order to further consider a mining project’s quality, it is important to understand how the company is valued and how it plans to mine a mineral resource.
There are two ways to look at the value of a mining project:
- The Discounted Cash Flow method estimates the present value of the cash that will come from a mining project over its life.
- In-situ Resource Value is a metric that values all the metal in the ground to give an estimate of the dollar value of those resources.
The location of the ore deposit and the quantity of its grade will determine what mining method a company will choose to extract the valuable ore.
- Open-pit mining removes valuable ore that is relatively near the surface of the Earth’s crust using power trucks and shovels to move large volumes of rock. Typically, it is a lower cost mining method, meaning lower grades of ore are economic to mine.
- Underground mining occurs when the ore body is too deep to mine profitably by open-pit. In other words, the quality of the orebody is high enough to cover the costs of complex engineering underneath the Earth’s crust.
When Technicals and Quality Align
This is a brief overview of where to begin a technical look at a mining project, but typically helps to form some questions for the average investor to consider.
Everything from the characteristics of an orebody to the actual extraction method will determine whether a project can deliver a healthy return to the investor.
Comparing Recent U.S. Presidents: New Debt Added vs. Precious Metals Production
While gold and silver coin production during U.S. presidencies has declined, public debt continues to climb to historically high levels.
Recent U.S. Presidents: Debt vs. Coins Added
While precious metals can’t be produced out of thin air, U.S. debt can be financed through central bank money creation. In fact, U.S. debt has skyrocketed in recent years under both Democrat and Republican administrations.
This infographic from Texas Precious Metals compares the increase in public debt to the value of gold and silver coin production during U.S. presidencies.
Total Production by Presidential Term
We used U.S. public debt in our calculations, a measure of debt owed to third parties such as foreign governments, corporations, and individuals, while excluding intragovernmental holdings. To derive the value of U.S. minted gold and silver coins, we multiplied new ounces produced by the average closing price of gold or silver in each respective year.
Here’s how debt growth stacks up against gold and silver coin production during recent U.S. presidencies:
|Obama's 1st term (2009-2012)||Obama's Second Term (2013-2016)||Trump's term (2017-Oct 26 2020)|
|U.S. Silver Coins Minted||$3.7B||$3.3B||$1.4B|
|U.S. Gold Coins Minted||$6.7B||$5.1B||$2.9B|
|U.S. Public Debt Added||$5.2T||$2.9T||$6.6T|
Over each consecutive term, gold and silver coin production decreased. In Trump’s term so far, the value of public debt added to the system is almost 1,600 times higher than minted gold and silver coins combined.
During Obama’s first term and Trump’s term, debt saw a marked increase as the administrations provided fiscal stimulus in response to the global financial crisis and the COVID-19 pandemic. As we begin to recover from COVID-19, what might debt growth look like going forward?
U.S. Public Debt Projections
As of September 30, 2020, the end of the federal government’s fiscal year, debt had reached $21 trillion. According to estimates from the Congressional Budget Office, it’s projected to rise steadily in the future.
|U.S. Public Debt||21.9T||23.3T||24.5T||25.7T||26.8T||27.9T||29.0T||30.4T||31.8T||33.5T|
By 2030, debt will have risen by over $12 trillion from 2020 levels and the debt-to-GDP ratio will be almost 109%.
It’s worth noting that debt will likely grow substantially regardless of who is elected in the 2020 U.S. election. Central estimates by the Committee for a Responsible Federal Budget show debt rising by $5 trillion under Trump and $5.6 trillion under Biden through 2030. These estimates exclude any COVID-19 relief policies.
What Could This Mean for Investors?
As the U.S. Federal Reserve creates more money to finance rising government debt, inflation could eventually be pushed higher. This could affect the value of the U.S. dollar.
On the flip side, gold and silver have a limited supply and coin production has decreased over the last three presidential terms. Both can act as an inflation hedge, while playing a role in wealth preservation.
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